Instability of the Tax Regime in Kazakhstan
For any investor (local or foreign), the stability of the state’s tax policy is an indicator of the level of favorable investment climate. There has been a struggle for investment between countries for a long time. And if earlier investors stood in line to countries rich in natural resources, now the governments and presidents of these countries are actively fighting to attract investment to their country.
In this review I would like to give an example of how inconsistent tax policy can be in Kazakhstan. And this is a very important problem. Investors no longer need low tax rates or any benefits or preferences. Investors only want stability and predictability. The issue of predictability of state actions is very important. After all, a truly high-quality investor comes with a project not for a year or two, but for 5-10-20 years or more. In such circumstances, the financial model of any investment project is calculated, summing up that the state will act in relation to the investor consistently and predictably.
Imagine you have rented an apartment for a long time. Considering that your rental contract is long-term and you expect the landlord to act consistently, you have decided to make expensive repairs at your own expense. In fact, capital costs were incurred. Imagine further that the landlord, after half a year of rent, decided to increase the rent by 50%. Will you ever trust such a landlord again?
On June 8, 2022, the Mazhilis of the Parliament of the Republic of Kazakhstan adopted amendments to the Tax Code of the Republic of Kazakhstan in the first reading. The amendments introduce a number of provisions that, if adopted, could allow investors to conclude that Kazakhstan has unstable and frequently changing taxation. I will give three examples from the said bill, which for some reason was called “urgent” within the Government. Although everything related to changes in taxation, by default cannot be urgently developed and adopted.
1) Increase in mineral extraction tax rates for solid minerals
(“MET”)
For the first time, the idea of increasing mineral extraction tax rates was voiced by the Minister of National Economy at a meeting of the Supreme Council for Reforms chaired by the President. The minister proposed increasing mineral extraction tax rates by 30%. And in the initial versions of the amendments, the increase in mineral extraction tax rates was in the same amount as announced at the meeting of the Supreme Council for Reforms - by 30%. However, later the Ministry of National Economy went further and increased the rates by 50%.
First, a 50% tax rate increase in itself will be viewed by current and potential investors as a “dramatic” change. And when this is still done urgently within 2-3 months and without a detailed analysis of the consequences, this objectively alarms investors who expect consistency and predictability from Kazakhstan.
Back in September 2021, the President called for actively attracting investment in geological exploration and the search for new deposits. And six months later, the Government of Kazakhstan is taking completely opposite steps, putting such investments at risk. The practice of other mining countries over the past 5-7 years shows that the first reaction of the heads of mining companies to an increase in royalty rates and mineral extraction tax is the withdrawal of funds by investors from financing geological exploration.
